Washington is at work on two new federal tax proposals that will
undoubtedly have impacts on your business. One comes from the IRS
and the other from Congress.

The IRS proposal is designed to encourage employers to establish
transportation spending accounts. Similar to the day-care and
health-care expense accounts employers now set up for their
workers, these accounts would allow employees to set aside pre-tax
money to pay for some of their commuting costs. The other proposal
concerns a House-passed bill that's designed to give taxpayers
additional rights when they take up with the IRS.

Joan Szabo is a writer in Great Falls, Virginia, who has
reported on tax issues for more than 13 years.

Free Ride, Almost

Under the IRS proposal, employees could set aside up to $65 per
month for both van-pooling expenses and transit fares, and up to
$180 per month for parking costs. Through these accounts, employees
receive reimbursement for their parking or transit fares and
don't have to pay taxes on that amount.

For example, a commuter with $245 in monthly parking and transit
expenses may be able to save $750 to $900 in taxes per year,
depending on the tax bracket. "This adds up to a tremendous
savings for employees," says Bonnie Whyte of the Employers
Council on Flexible Compensation (ECFC), an association
representing 2,800 employers nationwide. It's a welcome idea to
employers as well. Though business owners are allowed to pay for
employee transit fares and parking, few employers currently provide
this benefit because of the cost.

The cost to an employer of setting up and administering the
proposed program should be minimal, as long as it's done within
the company, says John Hickman, a partner in the Atlanta office of
the law firm Alston & Bird LLP and chairman of ECFC's
technical advisory committee. With day-care and health-care
accounts, companies often use third-party administrators because
such programs involve a level of expertise not available in most
companies, but that option is obviously expensive. The individual
who does your company's billing and payroll should be able to
handle the transportation account, according to Hickman.

As a way to encourage employers to sign up for the program, the
IRS will allow them to establish and operate transportation savings
accounts without written plans, which are normally required when
companies set up new fringe benefits. In addition, the program
would allow workers to carry into the next year any unused portions
of their monthly allotments. With health-care and day-care spending
accounts, employees are required to use what is in their accounts
by the end of the year or forfeit any funds that have not been
spent by that time.

The proposed rule would also simplify record-keeping
requirements to some extent. For example, workers could show
receipts for parking or transit costs if they are available; and if
they aren't, employees would still be able to sign a statement
indicating that they have incurred the costs.

The new proposal "would be ideal for small to midsized
companies," says Whyte. "It would work especially well in
urban areas with expensive parking where large numbers of people
take public transportation."

One issue that still must be clarified by Washington has to do
with the effect these proposed transportation accounts would have
on pensions. Unfortunately, lawmakers did not indicate whether
reducing workers' pay for tax purposes to provide the
transportation benefit also lowers it when calculating retirement
benefits.

Whyte says she expects clarification on that issue either from
the IRS or Congress. She predicts the rule will be finalized by the
end of the year.

Righting Possible Wrongs

On April 11, the House passed a new taxpayer rights bill (H.R.
4163) that would provide taxpayers with additional protections when
having to deal with the IRS. The measure is a follow-up to the
Internal Revenue Service Restructuring and Reform Act of 1998.

Under this most recent measure, penalties on unpaid taxes would
be reduced and penalties or interest charged would be eliminated
when the IRS causes a mistake or an unreasonable delay during a tax
investigation. It also aims to clarify rules about the disclosure
of tax return information. For example, the measure would provide
for judicial review of an IRS decision to withhold the release of
information on a return. The IRS would also be required to let
taxpayers know whenever their returns have been inspected or when
tax information has been disclosed illegally.

While this bill promises some improvements when dealing with the
IRS, its disclosure provisions may not be especially beneficial for
business owners, says Mark Luscombe, principal federal tax analyst
with CCH Inc., a Riverwoods, Illinois-based provider of tax and
business law information. As now drafted, the bill raises concerns
that "too much confidential tax information would be disclosed
in an administrative tax proceeding," he explains. For
example, tax return information might be disclosed during
situations where the IRS is scrutinizing cash payments to partners
in a partnership.

The White House responded to the legislation by saying the
admin-istration is committed to strengthening taxpayer rights and
will continue to work with Congress and the IRS to ensure that
taxpayers receive the best service possible. Nevertheless, the
Clinton administration's Office of Management and Budget (OMB)
did register some objections. It's specifically concerned about
a provision that would allow an exclusion from income for interest
received on overpayments of tax. OMB claims that dishonest
taxpayers would have an incentive to "invest" with the
IRS by "intentionally overpaying their taxes in order to
receive this tax-free interest."

OMB says it's possible that Congress can address these
concerns by modifying the bill. If the changes meet OMB's
satisfaction, analysts predict this new taxpayer rights bill could
be one of a number of provisions in a tax measure that Congress is
likely to clear this session.

While the House usually passes smaller tax measures, "the
Senate tends to gather all the little tax bills the House has
passed and put them together in one big bill for
consideration," says Luscombe. But there are, of course, still
no assurances that even if a bill passes, it will actually see the
light of day. "There could be another situation like last
year," he explains, "where Congress came up with a big
tax bill, but the president vetoed it."